Wednesday, September 5, 2012

Despite having posted surprisingly impressive quarterly earnings over
the week, the rise in the share price of IHH will likely be at a measured pace.

IHH's second-quarter net profit showed an impressive increase of more
than five times to RM403.54mil from the corresponding period last year.
Earnings per share (EPS) rose to an impressive 6.51 sen from 1.74 senin the
same quarter last year.

Turnover was more than three times higher at RM2.7bil for the
second-quarter, compared with RM816mil for the preceding year's corresponding
period.

For the first six months of 2012, IHH's net profit stood at RM527.4mil,
with an EPS of 8.63 sen, compared with a net profit of RM178.5mil and an EPS of
4.97 senin the same period last year. Turnover of the company for the first
half rose to almost RM4bil from RM1.7bil a year earlier.

No doubt, such a trend underscores the promising future and potential
of IHH - the second-largest listed healthcare services provider by market value
in the world (and the largest in Asia-Pacific).

While earnings have
received a huge boost from one-off items, IHH's core segments have exhibited
decent growth, led by its hospitals in Malaysia
and Singapore .

At its present
price (Sept 2012), IHH's shares are considered to be rather “expensive”
when compared to the valuation of its global peers. At RM3.20 per share, IHH
trades at more than 40 times its estimated earnings for 2012. In comparison,
its peers on average trade at around 25 times their earnings.

IHH has 22 cornerstone investors, comprising local and international
institutional funds as well as international sovereign wealth funds. They
include Malaysia 's
Employees Provident Fund (EPF), Permodalan Nasional Bhd and Lembaga Tabung
Haji; and international investors like BlackRock Inc, Capital Investment Inc,
Kuwait Investment Authority, and the Government of Singapore Investment Corp
Pte Ltd.

At present, IHH is majority-owned by
Malaysia 's state investment arm,
Khazanah Nasional Bhd, which has a 45.7% stake in the company.
Japan 's
Mitsui & Co Ltd is the second-largest shareholder in IHH, with a 20.48%
stake.

According to some market observers,
IHH is seen as an entity that has very strong backing because of the list of
prominent institutional fund managers that it has as investors. This factor,
they argue, can help attract and sustain interest in the counter.

Some of IHH's investors, especially those linked to the Malaysian
government, are unlikely to sell down their shares significantly due in part to
strategic reasons. Such stability' will likely encourage cornerstone investors
to stay invested in IHH even at the end of their lock-in' period.

In general, IHH has many good things going for it.

The aggressive plan to increase its hospital beds by more than 60% over
the next three to five years should sustain the group's earnings growth.”

IHH boasts of a large network of operations spanning across eight
countries. It has more than 4,800 beds in 30 hospitals. And the group has
reiterated its intention to add over 3,300 hospital beds in the next few years.

The industry trends in general are working in the favour of IHH. These
trends include an ageing population; developing healthcare markets in
Asia ; rising affluence in the region, which is expected
to drive demand for quality healthcare; and increasing medical tourism in the
region.

Most analysts,
however, argue that all the positives of IHH have already been “priced
in” and reflected in its current share prices (Sept 2012).

Needless to say, despite having so many good things going for it, there
are still risks that IHH has to contend with. These include intensifying
competition within the industry, the failure of the company to bring to
fruition its expansion plans, economic weakness that could affect demand for
its services and higher operating costs that could eat into its margins.

Another
disadvantage is that IHH does not have a clear dividend policy.

Moreover, its close to half a billion in US dollar denominated debt
could prove to be a thorn.

The group’s 60% owned Turkish arm, Acibadem Holdings, has been
pushed into the red by foreign exchange losses on an unhedged cross currency
loan amounting to US461 million. The loans is serviced in Turkish lira and the
lack of any hedging fallback makes these foreign borrowings a wildcard for IHH.

Turkish unit has a
rm823 million bullet payment due in 2015. The second tranche of US$203.6
million is an amortised loan with capital and interest that will be repaid on a
semi annual basis until 2018.

In contrast, the
group’s total long term borrowings stood at rm7.18 billion as at June 30,
2012.

Acibadem improved operationally during the second quarter but foreign
exchange losses amounting to rm27 million, due to a 1.4% appreciation in the US
dollar against the Turksih lira, resulted in a small overall net loss.